5 Top Trading Tips All Traders Must Know in 2021

On the surface, trading can look like a simple game to some. After all, you’re only really buying shares when they’re at low prices and selling them when they’re high, right?

Wrong. As anyone with some experience in the big, bad world of trading will tell you, there’s a lot more to it than may initially seem.

Here are five simple, useful tips we recommend to all traders, of all experience levels and abilities.

1. Develop a Trading Plan

The first step for any trader hoping to make a living – or even a bit of extra cash – out of this caper is to develop a detailed trading plan.

While it may sound simple, having a defined system for how you want to approach your trading will take a lot of the guesswork and emotions out of your work, which will, in turn, lead to you trading more efficiently.

We have found that the most effective trading plans consider three main factors:

  1. What is the mindset behind your trading? (I.e. what is your approach from a psychological standpoint?)
  2. What is your method for managing your money? (I.e. what size are your positions? What are your stop losses? Etc.)
  3. What is your trading method? (I.e. do you have a daily routine? What are the triggers for you to enter a trade? Etc.)

Of course, these can be further broken down, but initially, it is always best to keep things simple.

Fundamentally, there are three questions every trader should be asking themselves at the beginning of their trading journey:

  1. What are the circumstances that will compel you to enter a trade?
  2. How much money are you willing to commit to any given trade?
  3. What are the circumstances that will compel you to close a trade?

Being able to answer these three questions will give you the outline of an effective trading plan, which is simple yet personal.

2. Begin With Low-Risk Stocks

The best way to begin your trading journey is always to turn your attention towards low-risk stocks. While the attraction of purchasing shares of a penny stock and making it rich instantly is obvious, 99.99 times out of 100 you’re better off purchasing a share of one of the major companies.

In times like these, where the market is approaching levels of volatility we’ve rarely (if ever) seen before, often the lowest-risk approach is to focus on purchasing stocks in companies which provide consumer staples. Even in high-volatility times, these companies tend to maintain a low level of movement as they’re producing goods – like soap, food, toilet paper etc. – which consumers will always need.

Another option in this space is utility companies, who traditionally experience gradual, consistent growth.

3. Only Invest What You Can Afford to Lose

This seems like a simple maxim, but it’s often the first thing people forget when they enter the trading world. Any investment you make – whether that’s in stocks, bonds, real estate etc. – is a risk, and there’s always a chance you can lose the money you have invested.

What this means, logically, is that any investor can find themselves in trouble pretty quickly by trying to overextend and put in money they don’t have. For example, if you’re investing money you need for living expenses in the hope of generating big returns, you’re setting yourself up to fail.

A clever way for aspiring investors to ensure they’re managing their money conservatively is to create a budget of all of your expenses. By doing so, you will be able to determine how much money you need to live on (bills, food, entertainment etc.), how much you plan to save, and how much money you have spare to spend on investing.

4. Assess Yourself and Your Goals

As mentioned above, any self-respecting trader will be working off a pre-prepared trading plan that they have developed for themselves. However, being properly prepared to trade takes more than just a trading plan.

It is essential that you conduct a self-assessment designed to answer some of the following questions about yourself:

  • What do you expect to achieve when entering the market?
  • What are your strengths and weaknesses, and how might they affect your trading performance?
  • What is your patience like?
  • Are you a risky person?
  • How self-confident are you?
  • Are you disciplined?

Only after answering these very basic questions should you start to ask yourself some harder questions about your finances, for example:

  • What percentage of your capital are you prepared to risk?
  • What is your position size?
  • How will you determine your stop-losses?
  • What will be your maximum risk-exposure at any one time?
  • What is your maximum amount of capital to commit on any one trade?

Now, with those questions answered, you can move on to determining your entry positions, for example:

  • What markets will you trade on?
  • What timeframe are you looking to operate within?
  • Will you use technical or fundamental analysis?
  • What conditions will push you to enter a trade?

Self-assessing yourself in this way will allow you to enter your trading journey with a clear head, knowing what your goals and aspirations are.

5. Do Your Own Research

Finally, there’s a very simple edge that any trader can gain on their competition; do your own research.

There are so many strategies, opinions and techniques out there for traders to confuse themselves with, but at the end of the day, the most successful strategy for you will be one you develop yourself. That means you’ll need to put in the work; read the literature, study the graphs and familiarise yourself with how the market operates.

Everyday investors are every bit as capable as Wall Street “experts”; all it takes is research, commitment and taking the initiative to make decisions that work for you.

Don’t rely on others to do your work for you; go out and do it yourself, because it’s the only way to learn!

Siraj Sarwar - Lead Analyst
@tradethedayfx
Siraj Sarwar has been performing analysis on the stock market, equity research and general business consultation. He regularly contributes articles on economics, commodities, and equities to the world's leading websites, including Trade the Day, SeekingAlpha, TheStreet, and MSN.
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